Assignment 1: The McConnell Department Stores Inc. Chief Exe

Assignment 1the Mcconnell Department Stores Inc Chief Executive Off

Compare the company’s profit performance and financial position with the industry averages using the provided income statement and balance sheet data for McConnell Department Stores, Inc. The assignment includes preparing a vertical analysis for both the income statement and the balance sheet of McConnell.

Additionally, analyze the comparative financial statement data of Danfield, Inc. for 2014 and 2015, calculating specific ratios—including current ratio, cash ratio, times-interest-earned ratio, inventory turnover, gross profit percentage, debt to equity ratio, rate of return on common stockholders’ equity, earnings per share, and price/earnings ratio—to evaluate the company’s ability to pay debts, sell inventory, and the attractiveness of its stock. Conclude whether Danfield’s financial health and stock attractiveness improved or deteriorated over the period.

Paper For Above instruction

Introduction

Financial analysis plays a vital role in understanding a company's performance and financial health. Vertical analysis, also known as common-size analysis, involves expressing each line item on financial statements as a percentage of a base figure, which facilitates comparison across periods and with industry averages. It is useful for analyzing trends within a company and benchmarking against industry standards. This paper presents the vertical analysis of McConnell Department Stores, Inc.'s income statement and balance sheet, followed by an analysis of Danfield, Inc.'s financial ratios over 2014 and 2015. The goal is to evaluate the company's profitability, liquidity, and overall financial health, as well as the attractiveness of its stock investment.

Vertical Analysis of McConnell Department Stores, Inc.

The vertical analysis of McConnell’s income statement and balance sheet for 2014 provides an understanding of the composition of its financial performance and position relative to total sales and total assets, respectively.

Income Statement Analysis

McConnell reported net sales of \$777,000, with cost of goods sold (COGS) accounting for 65.8% of sales, resulting in a gross profit of 34.2%. Operating expenses were 19.7%, leading to an operating income of approximately 14.5%. After accounting for other expenses, net income represented about 14.1% of net sales. These percentages suggest that McConnell has a healthy gross margin, although its operating expenses consume a significant portion of sales, indicating areas where efficiency could be improved.

Balance Sheet Analysis

McConnell’s assets totaled \$480,000, with current assets constituting 70.9%, highlighting liquidity. Fixed assets were 23.6%, and intangible assets accounted for 0.8%. Total liabilities were 64.7%, with current liabilities being 48.1%, indicating a substantial portion of current liabilities relative to current assets. Stockholders’ equity was 35.3%, demonstrating a relatively conservative leverage position but also reflecting room for increased equity financing.

Comparative Financial Ratios for Danfield, Inc.

The ratios for 2014 and 2015 illustrate changes in liquidity, solvency, profitability, and market valuation.

1. Liquidity Ratios

Current Ratio:

The current ratio is calculated as current assets divided by current liabilities. In 2014, it was \$560,000 / \$246,000 ≈ 2.28, and in 2015, \$577,000 / \$225,000 ≈ 2.56. The increase indicates improved short-term liquidity and ability to meet obligations.

Cash Ratio:

Cash divided by current liabilities. In 2014, \$95,000 / \$246,000 ≈ 0.39, and in 2015, \$97,000 / \$225,000 ≈ 0.43. The slight increase suggests a marginal improvement in immediate liquidity.

2. Solvency and Profitability Ratios

Times-Interest-Earned Ratio:

Earnings before interest and taxes divided by interest expense. Assuming operating income as EBIT, 2014: \$76,000 / \$10,000 ≈ 7.6, 2015: \$94,000 / \$9,000 ≈ 10.44. An increase indicates better capacity to cover interest payments.

Debt to Equity Ratio:

Total liabilities divided by shareholders’ equity. 2014: \$339,000 / \$130,000 ≈ 2.61, 2015: \$339,000 / \$160,000 ≈ 2.12. The decrease suggests a reduction in leverage, reflecting a more conservative debt position.

3. Operational and Market Ratios

Inventory Turnover:

COGS divided by average inventory. 2014: \$237,000 / \$145,000 ≈ 1.63; 2015: \$237,000 / \$145,000 ≈ same. Although similar, the ratio indicates relatively slow inventory turnover, possibly pointing to excess inventory.

Gross Profit Percentage:

Gross profit divided by net sales. 2014: \$230,000 / \$467,000 ≈ 49.2%; 2015: \$230,000 / \$467,000 ≈ same. Indicates consistent profit margin on sales.

Rate of Return on Common Stockholders’ Equity (ROE):

Net income divided by average equity. 2014: \$39,000 / \$97,000 ≈ 40.2%; 2015: \$61,000 / \$119,500 ≈ 51.1%. The rising ROE suggests improved profitability and efficiency in generating return for shareholders.

4. Market Ratios

Earnings Per Share (EPS):

Net income divided by shares outstanding. 2014: \$39,000 / 10,000 = \$3.90; 2015: \$61,000 / 12,000 ≈ \$5.08. Increased EPS reflects improved profitability and potential appeal to investors.

Price/Earnings (P/E) Ratio:

Market price per share divided by EPS. 2014: \$46.54 / \$3.90 ≈ 11.93; 2015: \$86.58 / \$5.08 ≈ 17.05. The increase indicates higher investor expectations or optimism about future growth.

Conclusion

The analysis reveals that Danfield’s liquidity improved during 2015, evidenced by higher current and cash ratios. Solvency also improved with a decrease in leverage, and profitability metrics such as ROE and EPS increased, reflecting stronger operational performance. The higher P/E ratio suggests increased market confidence in the company’s future prospects. Overall, Danfield’s financial health and stock attractiveness appear to have enhanced over the analyzed period. This positive trend indicates effective management and favorable market perceptions, which can attract more investors and support future growth.

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